Vlog: Understanding Risk

Hey, this is Erik Hitzelberger with Freedom Property Group, and today I want to talk to you about to you about risk. Risk is a word that most of us feel like we understand, but it often doesn’t mean what we think it means. By that, let me start with the definition. The best definition of risk that I’ve seen is that risk is a measure of the likelihood of us achieving a goal. Actually it’s really the inverse, it’s the likelihood of us not achieving the goal. The higher the risk, the less likely we are to achieve the goal, and the lower the risk, the more likely we are to achieve a goal.

When we look at it in terms of goals, it changes our risk perception sometimes. As an example, if you and I, had the goal of not being injured, it might be a good idea to not parachute out of a plane, right? That increases our risk of being injured, and it decreases our risk of achieving the goal. However if someone wanted to be a special forces operative, right? They have to jump out of the plane, and they have to learn how to parachute out of a plane in a variety of conditions. The risk in that case would be staying on the ground, not jumping and not parachuting from that plane is the higher risk situation in that scenario because of the goal.

Financially, it works the same way. If I have $100,000 and my goal is to turn that $100,000 through investments into a million dollars in 25 years, I need to earn about a 10% return, maybe just a little bit under a 10% return. If I take my money and I put it in a CV, and I put it in the bank, and invest it in that matter, I earn .6% on my money, which is what Chase is currently offering. My risk is nearly 100% that I won’t achieve my goal. Putting that money into a CV is one of the riskiest things I can do with it, short of maybe setting it on fire.

However, if I take that money and I invest it in an asset class, or make an investment where there is the opportunity to at least make that 10% return, now I have a good chance of meeting my goal, and my risk has actually gone down. How can we further reduce the risk? First of all, we need to choose something that gives us the opportunity, and then we need to reduce that risk so that we’re as close to meeting the goal as possible. The way that we reduce risk further is through control. The more control we have, the lower the risk, the higher the opportunity to meet the goal, and the less control we have, the higher the risk, and the lower the opportunity to meet the goal.

We want to have as much control of that as possible. When we look at what most people do, and that is they just blindly dump money into a 401K, or an IRA. They hope that they’re going to achieve that goal sometime in the future, but you have no control over the mix of investments that you’re making. You have no control over the systemic market risk. Is there a disruptive technology, is there some sort of event that occurs that maybe makes the entire market not perform as well, or the entire sector not perform as well? We don’t have control over the individual companies. Is a company under performing? Is the CEO doing something unethical? We have no control over virtually any aspect of investment in a 401K or an IRA fund, mutual funds.

However, if we look at real estate, and look at the things that we can control. First of all, it offers the opportunity to achieve our goal. That’s a positive. The second, it offers a lot of control, right? We can control the type of properties we buy. We can control the market in which we purchase homes. We can control the type of tenants that come into our homes. The lease criteria and the criteria for the tenants. When and if we want to sell the house. So there’s a lot of aspects that we can control. Not everything, but certainly more than just blindly putting money into a 401K.

That’s why real estate is one of the best asset classes to invest in. When you consider risk as a measure of the likelihood of achieving a goal, or of not achieving a goal, then we can really minimize that risk that’s out there because of the opportunity that we have, and the control. If you want to learn more about turnkey investments, check us out at FreedomPropertyGroupKY.com. Thanks.

Summary

Title

Understanding Risk

Description

Investment is all about risk, but what does risk really mean, and how do you decide how much risk you're willing to take?

Founding member of Freedom Property Group and Part-Time REI. I started investing in 2006 as a method to produce additional income for my family so that we could have the security that we wanted. Now I enjoy teaching others how to achieve financial freedom just like I have.